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Is the Economic Crisis a Moral Issue?

April 11, 2008

Supposedly there are moral issues (such as abortion and other family-related concerns) and then everything else (taxes, trade, environment, and so on). But this is to misunderstand the responsibilities of government. While there are diverse moral languages appropriate to families, schools, sports, and business, for example, the moral language fitting for government and politics speaks of justice and injustice.

In that respect, almost everything associated with the current economic crisis is a matter of justice and injustice and is therefore a moral issue. Government is active in the economy in the way it sets tax policies, allows banks to offer mortgages to people who can afford little or no down payment, and is now sending money to taxpayers to try to stimulate a faltering economy even though the money it distributes is borrowed (as debt) from future taxpayers.

The economic crisis that government is now trying to solve or alleviate, in other words, is not an innocent accident. It is the fruit of a great deal of injustice—the injustice of government piling up public debt and encouraging individuals, businesses, and financial institutions to do the same.

One small window on our multi-dimensional predicament has been opened by John Plender (Financial Times, 4/8/08, p. 7). Income inequality in the U.S. today, writes Plender, “is at its highest since that most doom-laden of years: 1929.” Back then financial institutions kept multiplying risk and leveraging debt until the system collapsed and the banks failed, causing the Great Depression. That was also a time when the gap between the richest and poorest was extreme, though not as extreme as today. The gap now is not simply a consequence of technological innovation, globalization, and healthy returns on sound investments. It is due significantly to tax policies, overleveraged debt, and weak oversight.

Here are the statistics Plender reports. “Between 1979 and 2005 the pre-tax income for the poorest households grew by 1.3 per cent a year, middle incomes before tax grew by less than 1 per cent a year, while those of households in the top 1 per cent grew by 200 per cent pre-tax and, more strikingly, 228 per cent post-tax.” Considered from another angle, “in 1979 the post-tax income of the top 1 percent was 8 times higher than that of middle income families and 23 times higher than the lowest fifth. By 2005 those ratios grew respectively to 21 and 70.”

The concentration of wealth in the top American income bracket is now more extreme than in any other developed country in the world. And who suffers most when the mountain of debt can no longer be sustained? Those whose jobs pay hardly enough to live on and who may, irresponsibly, have taken out a low-or-no-down-payment mortgage at the encouragement of irresponsible lenders at the encouragement of those responsible to regulate financial institutions. Everyone hoped (speculated) that ever-rising home prices would give homeowners ever-increasing equity, allowing them to go ever further into debt to keep the consumption game going. But all that has changed, says Plender. “The collapse of the American housing market has left negative equity in its wake. For many, the cost of living is rising faster than wages. Houses can no longer be used as cash dispensers and savings are having to be rebuilt.”

There are many immoral, irresponsible decisions by individuals and businesses in all of this. But there is also a great deal of immoral injustice on government’s part. We should be outraged, but our anger should be directed to the entire system that includes each of us who bought into the belief that economic growth is the chief end of government and that there must be a way for everyone to benefit from the ever-increasing leveraging of debt. It won’t work. There is reason to doubt, however, that government, investors, and individuals are prepared to give up the false hope that there is a quick and easy road to prosperity.